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AP Macroeconomics

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I. Basic Economic Concepts • Scarcity: wants > resources • Economics – study of how people satisfy wants with scarce resources • Economics is the study of choices. • Microeconomics deals with specific economic units such as individuals, households, & businesses. • Macroeconomics: Deals either with the economy as a whole or basic subdivisions such as government, households, or business sectors.

I. Basic Economic Concepts • relation v. causation: Just because something happens when something else happens does not mean one caused the other. It may just be that they are correlated. • positive statement-the way things are • normative statement-the way things ought to be • CETERIS PARIBUS: If all other things stay the same. • The economy resembles a complex machine or a living organism. To better determine how it works (or what’s wrong with it), simple models are used that assume ceteris paribus. In this way, we seek to determine how one part of the machine affects another.

I. Basic Economic Concepts • Utility=satisfaction • Marginal utility is the satisfaction of getting one more. • The law of diminishing marginal utility: utility declines with each additional unit. • By dividing MU by P, one can see how much bang they’re getting for their buck. • By comparing MU/P for a variety of goods, one makes rational purchasing decisions.

II. Opportunity Cost • The O.C. of an item is what you give up to get that item. • The O.C. of an item is the best alternative foregone. • Consumer Goods vs. Capital Goods • Consumer Goods vs. Military Spending • “There is no such thing as a free lunch.”

II. Opportunity Cost • The Production Possibilities Curve is a chart that illustrates the limits of what can be produced by an economy. • Assumes: • Fixed resources & technology • 2 products • Efficiency and/or Full Employment

II. Opportunity Cost • 2 types of efficiency: • productive-full use of all resources • allocative-who gets what • The PPC represents productive efficiency. • Allocative efficiency depends on what you consider to be “fair”.

II. Opportunity Cost • Operating inside the PPC is inefficient. • Operating outside the PPC for a long period of time is impossible.

II. Opportunity Cost • Why is the PPC curved/concave? • The Law of Increasing Opportunity Costs: • Not all resources are easily converted to producing the other good/ service.

II. Opportunity Cost • What is Crusoe’s O.C. of four fish? • What is Crusoe’s O.C. of each fish? • What is Crusoe’s O.C. of eight coconuts? • What is Crusoe’s O.C. of one coconut? • Per-unit opportunity cost can be determined bymaking the ends of the PPC into a ratio &setting 1 side equal to one.

II. Opportunity Cost • What is the opportunity cost of 90 guns? • What is the opportunity cost of 50 butter?

Market • Advantages: • markets can adjust over time • when producers answer 3 q’s, it is more efficient • individual decisions direct the use of scarce resources • larger variety of goods

Market • Disadvantages: • the way FOR WHOM is answered • without government regulations, without enforced rules of the game, adequate competition may not occur or may fade away • only rewards production, so those who don’t produce suffer (young, old, sick)

I. Capitalism • FOP privately owned • individuals must have control of property (Corp. clip) • intellectual, artistic, etc. property ownership. • Freedom of enterprise and choice • owners must be able to use property any way they see fit • workers must have access to any occupation they see fit • consumers must have access to all goods and services

I. Capitalism • Prices set by market (goes hand-in-hand with market system) • market: mechanism or arrangement bringing buyers and sellers together • through price, the market decides what is to be produced, for whom, and how. • Role of self-interest: all parties must be free to try to get the most out of the system. • Buyer tries to get a low P. seller tries to get a high P

I. Capitalism • Competition: Large # buyers/sellers, each free to enter/exit the market • Large # of buyers/sellers ensures that no individual buyer or seller can influence the price. • Under such competition, what would happen if one seller decided to increase the price of their goods? • Limited government interaction. The market must be self-regulating.

I. Capitalism • Advantages: efficiency, freedom, individual satisfaction • consumer sovereignty: to make profits, producers must make things consumers will buy, so the consumer indirectly answers the WHAT question • Disadvantages: underproduction of public goods, only produces for those with $$, unstable

Max they can produce of each Coco-nuts Fish Young Guy 10 10 Old Guy 4 8 III. Absolute Advantage • When 1 person/ business/country, etc. can produce a good or service more efficiently than another person/business/country, etc. • Young guy has absolute advantage in coconuts & fish.

III. Absolute Advantage • Some problems ask you to consider inputs rather than outputs to determine O.C. and/or absolute advantage. • Output problems state that you get a certain amount of product out of a given input. • Input problems state that it takes a certain amount of input to get a given product.

IV. Comparative Advantage • EVEN IF a country has an absolute advantage in all goods, trade can still be beneficial. • All countries benefit by making what they have a comparative advantage in, & trading.